When the Obama Administration argues that more financial regulation is needed to set us on the path to economic recovery, I would like to respectfully submit that the Great Recession could have been avoided, but its cause can be placed primarily on the shoulders of government, not on greed on the part of investment bankers and business people. The Dodd Frank Financial Reform Act was the worst bill since Hawley met Smoot.
The Securities & Exchange Commission (the “SEC”) specifies which rating agencies qualify for being Nationally Recognized Statistical Rating Organizations or (“NRSRO”). Because the SEC gave such designations to Moody’s, Fitch and Standard and Poor’s, the SEC began assessing the credit quality of mortgage securitizations. However, the rating agencies were “gamed” by the investment bankers, who, if one rating agency said no to a securitization, they would go to another, and find a more receptive rating agency was found. As these agencies were after market share, they did, in large measure, what the investment bankers wanted, and given substantial stock option awards by these agencies, they caved.
Alan Greenspan, then head of the Federal Reserve, often argued that bubbles were impossible to detect and, furthermore, impossible to prevent. Perhaps that is true, but I would argue he should have been able to detect this bubble as the statistics offered clear evidence.
Year
GDP
Total Mortgage Debt
Percentage of Mortgage Debt to GDP
1974
1500
419.3
27.95%
1975
1638.3
459
28.02%
1976
1825.3
517
28.32%
1977
2030.9
603
29.69%
1978
2294.7
708.6
30.88%
1979
2563.3
827
32.25%
1980
2789.5
927
33.21%
1981
3128.4
998
31.91%
1982
3255
1031
31.68%
1983
3536.7
1116
31.56%
1984
3933.2
1243
31.60%
1985
4220.3
1450
34.35%
1986
4462.8
1648
36.93%
1987
4739.5
1828
38.57%
1988
5103.8
2054
40.25%
1989
5484.4
2277
41.52%
1990
5803.1
2506
43.18%
1991
5995.9
2683
44.75%
1992
6337.7
2854
45.03%
1993
6657.4
3013
45.26%
1994
7072.2
3180
44.97%
1995
7397.7
3334
45.07%
1996
7816.9
3599
46.04%
1997
8304.3
3756
45.23%
1998
8747
4058
46.39%
1999
9268.4
4435
47.85%
2000
9817
4821
49.11%
2001
10128
5328
52.60%
2002
10469.6
6036
57.65%
2003
10960.8
9377
85.55%
2004
11685.9
10637
91.02%
2005
12421.9
12070
97.17%
2006
13178.4
13412
101.77%
2007
13807.5
14516
105.13%
2008
14264.6
14661
102.78%
2009
13973.7
14370
102.84%
2010
14498.9
13712
94.57%
2011
15075.7
13384
88.78%
Sep 30, 2012
15811.0
13119
82.97%
In 1974 mortgage debt as a percentage of mortgage debt to GDP was a mere 28%, at its peak it rose to 105.13%. True Dr. Greenspan was no longer at the Fed but much of the explosion in mortgage debt took place under his watch.
Perhaps the most telling statistic is relating mortgage debt to personal income as shown below:
(in billions of dollars)
Mortgage Debt Outstanding
$6789
$10666
$12065
$13458
$14529
$14640
$14673
$14386
$13730
Personal Income
$8559
$9937
$10486
$11268
$12480
$12391
$13974
$14499
$15076
Percentage of Mortgage Debt to Income
79.32%
93.17%
115.06%
119.43%
116.42%
84.64%
95.24%
100.79%
109.80%
In 1982 mortgage debt to personal income was a paltry 33.45% and even between 1980 and 2000 for select years averaged roughly 72%. When mortgage debt to person income rose in 2005 to 115.06% alarm bells should have been ringing loudly within the Fed.
Senator Daniel Patrick Moynihan said it best, “Everyone is entitled to their own opinion but not his or her own facts.”
The author spent 36 years in commercial banking and last served as General Manager for Depfa Bank. He currently is teaching at NYU’s School of Continuing Education and is the author of “Handbook of Corporate Lending” and “Case Studies in Corporate Lending,” both published by Amazon.
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